ObamaCare's Flawed Economic Foundations

The insurance mandate has almost nothing to do with remedying costs imposed on the system by those without coverage.

By

Douglas Holtz-Eakin

And Vernon L. Smith

Updated March 20, 2012 10:26 a.m. ET

ObamaCare will be argued next week in the Supreme Court. While the justices will consider the intricacies of constitutional law, at their heart the arguments in favor of the legislation have to do with the economics of health care.

Consider the individual mandate to purchase health insurance. The Obama administration defends the mandate on the ground that a person's decision to not buy health insurance affects commerce by materially increasing the costs of others' health insurance. The government adds that health care is unique and therefore can be regulated constitutionally in ways other markets cannot.

In reality, the mandate has almost nothing to do with cost-shifting. The targeted population—the young, healthy and not poor who choose to forgo coverage—has a minimal role in the $43 billion of uncompensated health-care costs. In 2008, for example (the latest figures available), the Department of Health and Human Service's Medical Expenditure Panel Survey showed that the uncompensated care of the mandate's targeted population was no more than $12.8 billion—a tiny one-half of 1% of the nation's $2.4 trillion in overall health-care costs. The insurance mandate cannot reasonably be justified on the ground that it remedies costs imposed on the system by the voluntarily uninsured.

The government's other defense is that the health-care market does not exhibit textbook competition. No market does. The economic features relied upon by the government—externalities, imperfect information, geographically distinct markets, etc.—are characteristic of many markets.

The presence of externalities and other market imperfections does not justify a departure from the normal rules of the constitutional road. Health care is typically consumed locally, and health-insurance markets themselves primarily operate within the states. The administration's attempt to fashion a singular, universal solution is not necessary to deal with the variegated issues arising in these markets. States have taken the lead in past reform efforts. They should be an integral part of improving the functioning of health-care and health-insurance markets.

Consider also the health law's expansion of Medicaid. As Prof. Richard Epstein argued on these pages ("ObamaCare's Phony Medicaid 'Deal,'" May 10, 2010), an expenditure of federal funds is unconstitutional when it coerces states rather than encouraging them to participate in a federal policy. And coercion is the essence of ObamaCare's Medicaid provisions.

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ObamaCare transforms Medicaid from a health-care program for impoverished and special-needs groups such as the disabled, into a mandatory federal entitlement—effectively obligatory on both the states and beneficiaries alike—that reaches even working adults whose incomes fall well above the poverty level.

The states are in no realistic position to say no. Consider what would happen if the states had declined to take federal Medicaid funds in 2009. Making up the difference to pay for their own Medicaid patients would mean increasing their budgets by 22.5%. Expressed another way, federal Medicaid spending represents an even more imposing 34.4% of taxes collected by the states nationwide. If states withdrew from Medicaid, the rise in uncompensated care would drive many providers out of business

If the Supreme Court understands these facts, it will be forced to invalidate the entire law. In particular, the individual mandate cannot be "severed" from the remainder of the health law in any meaningful economic sense. Numerous provisions of the law impose significant costs, such as fees, taxes and benefit mandates on health-care market participants, primarily health-insurance companies. Congress would not have imposed such costs without the countervailing revenues raised by the individual mandate—not just as a matter of politics, but because such uncompensated costs would be passed on to patients, undermining the central goal of the law to make health care more affordable.

Without the individual mandate, ObamaCare imposes total net costs of $360 billion on health-insurance companies from 2012 through 2021. With the mandate, the law would provide a net $6 billion benefit—i.e., revenues in excess of costs—over that same time period. In other words, the benefits of the individual mandate to health-insurance companies, along with their additional revenues provided by ObamaCare's Medicaid expansion, are projected to balance, nearly perfectly, the costs that the law's various regulatory mandates impose on insurers.

The individual mandate and Medicaid expansions appear to many to be unconstitutional. They are certainly bad economic policy. When they go, the entire law must fall. The administration built an intricate, balanced policy on a flawed economic foundation. It is up to the Supreme Court to pull it down.

Mr. Holtz-Eakin, a former director of the Congressional Budget Office, is president of the American Action forum. Mr. Smith is a professor of economics at Chapman University and the 2002 Nobel Laureate in Economics. The American Action Forum has filed three amicus briefs for NFIB v. Sebelius and Florida, et al., v. Sebelius that have been co-signed by hundreds of economists and health policy experts.

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